Mortgage Market: Tighten Or Loosen?

Business | May 14, 2021


As I write this blog post on Thursday afternoon, I have thirteen offers on a listing for a piece of land that has a dilapidated house on it.  Make no mistake: this sale is for the land.  We are selling this property in as-is condition with no representations or warranties.

And yet, there are still thirteen offers…

The real estate market is alive and well, but to many, this is a problem.  Housing affordability is almost an oxymoron in 2021, and the media has been obsessed with real estate over the past couple of months.

Real estate auctions, bidding wars, letters to sellers, “blind bidding,” the mortgage stress test, and interest rates are just a few of the topics that have been explored over and over.

And sometimes, the media covers topics that are far from timely:

Thursday, May 13th in the National Post: “GTA Buyers Waiving Home Inspections En Masse”

Cool.

Welcome to 2009.

With respect to the author, the newspaper, and the individuals profiled in the article, this is nothing new.

I’m not writing blogs discussing the war that was fought in Europe between 1939 and 1945 because I try to stay current.

I realize that not everybody in the market is as informed as the TRB readers, so yes, I’m being a bit of a jerk here.  But as I pointed out last week, some headlines are downright wrong, and ones like the headline above are bringing to light business practices that have been around as long as I’ve been in this business.

Nevertheless, there’s a lot of talk about the market, rising prices, and “what to do about it.”

We discussed this at length last month in these two posts:

“Problems, Solutions, & Everything In Between”

“Problems, Solutions, & The Problem With Those Solutions”

It’s really, really interesting to see how different individuals, businesses, or industries feel housing affordability should be dealt with.

Here’s a letter that TRRREB sent to Jeremy Rudin at the Office of the Superintendent of Financial Institutions (OSFI) earlier this week as it pertains to proposed changes to the mortgage stress test:

 


 

Dear Mr. Rudin,

On behalf of the Members of the Toronto Regional Real Estate Board (TRREB), I would like to thank-you for the opportunity to provide input to the consultations on the minimum qualifying rate for uninsured mortgages.

As REALTORS®, TRREB Members are also Members of the Canadian Real Estate Association (CREA). As such, TRREB supports and echoes the input that has been provided by CREA on this issue.  In particular, while it is important to monitor economic conditions and ensure responsible household debt, it is also important to ensure that measures, such as the B-20 guideline implemented by the Office of the Superintendent of Financial Institutions, do not have unintended consequences.

With this in mind, we support CREA’s recommendations to review the mortgage stress test to ensure the realities of local real estate markets are taken into consideration and to remove the stress test from mortgage renewals, for the following reasons:

  • adjusting the stress test to make it more regional in nature would reflect the realities of each real estate market across the country;
  • a regional test could better reflect market conditions by considering factors such as housing market activity, average cost of a home in that market, employment levels, average income and cost of living in the area;
  • there is precedent for national programs to be tailored to address regional socio-economic factors (e.g. Employment Insurance Program, First Time Home Buyer Incentive); and,
  • because the stress test applies to existing mortgages, many borrowers end up remaining with the same lender at the time of renewal, rather than seek more competitive rates.

TRREB also believes that transparency is important with regard to the stress test.  In this regard, it is important that OSFI clearly communicate its process and rationale for establishing the minimum qualifying rate. This would allow people to anticipate future changes to the guideline and would help to provide more informed feedback to OSFI.

TRREB appreciates federal efforts to ensure the health of the Canadian economy and real estate markets, but it is important to ensure that these efforts do not have unintended consequences, as noted above. We look forward to continuing to work with OSFI and the federal government to help ensure as many Canadians as possible can achieve the dream of home ownership.

Sincerely,

Lisa Patel
President

 


 

A cynic will suggest that it’s no surprise TRREB, along with CREA, are fighting a tightening of lending regulations in Canada.

Personally, I think tightening the stress test does nothing to stop houses from appreciating, and everything to ignore top-down issues in our country, province, and city.  But those thoughts were flushed out in the two blog posts from last month (links above), so we won’t beat that dead horse any further into oblivion.

At the same time that some lobbyists want to make it easier for buyers to enter the housing market, it seems others are hoping for the opposite.

Case in point, the following article in this week’s Financial Post:

Canadians Are So Anxious About The Blistering Housing Market They’re Open To Rate Hikes To Cool It
Financial Post
Bloomberg News
Ari Altstedter & Erik Hertzberg
May 12th, 2021

Canadians are so alarmed by the red-hot housing market that many say they’d like to see the central bank raise the cost of borrowing to dampen demand for real estate and stabilize prices.

About 70 per cent of Canadians responding to a new Nanos Research poll conducted for Bloomberg News said the sharp increase in home prices was a major problem for the economy. Almost half were at least somewhat in favour of the Bank of Canada raising its overnight rate to slow the rise, even though such a move would also increase the cost of credit lines, credit cards and other debt.

The numbers underscore how soaring housing costs have emerged as a major issue in the public consciousness after a year in which prices jumped by 30 per cent or more in some regions. Economists at major banks have called on the government to act to reduce demand. At the same time, the Bank of Canada has made it clear it won’t raise rates until the economy absorbs its excess capacity — a milestone projected for 2022 at the earliest.

“Even though there is no consensus, the fact that one in two Canadians are good with a rate hike speaks to the appetite to cool down a hot housing market,” pollster Nik Nanos said.

Those sentiments are prompting some anxiety for Canadians — including some homeowners whose own fortunes are rising with the real estate market.

“I own a place, but I also have a son too. When I think about my son, it’s like, how is he going to survive in this world?” said Raymond Wong, a Vancouver engineer who filed a petition with Canada’s parliament saying the central bank should consider house prices when setting interest rates. “He can do everything right, do everything by the book, get an education, but at the end of the day he won’t be able to afford anything.”

The Bank of Canada’s long-standing position has been that it should be the last line of defence against threats to financial stability, as its focus is on other priorities, like maintaining healthy inflation and output growth.

Most economists say it’s still too early in the recovery for the central bank to hike rates, and it’s not clear that the survey respondents who favoured raising rates took full account of the broader effect of higher borrowing costs.

Still, Canadians’ growing alarm at the recent surge in home values could present a political problem for Prime Minister Justin Trudeau. The government has options other than raising interest rates to slow the housing market, like taxes and regulation, but has refrained from using them for fear of angering homeowners.

The widening gulf between Canadians with property and those without has some vocal critics casting the issue as a battle among classes or generations.

And like so many modern revolutionaries, Canada’s housing discontents are congregating on Reddit. On a subreddit called r/canadahousing, about 8,500 members share memes, post news articles and discuss what they refer to as Canada’s housing crisis.

The Redditors are also organizing. Using the proceeds from a GoFundMe campaign, they recently rented two billboards to be put up this week in Toronto and Ottawa. The Toronto one will say, “Can’t Afford a Home? Have You Tried Finding Richer Parents?” while the Ottawa will read, “Homes Aren’t For You. They’re For the Rich. You Can Rent.”

“We’ll be the generation that can never retire because of housing prices. The barrier to entry has never been higher,” said Greg Murray, a 33-year-old corporate strategy executive who was a spokesman for the Reddit group. (A few days after Bloomberg spoke to Murray, he stepped away from the group.) “Our government is not even admitting it’s an issue, they’re not even acknowledging it at this point, and that’s what we’re fighting to raise awareness of.”

In Canada as in the U.S., home ownership has long been seen as essential to securing a place in the middle class, prompting Canadians to own their homes at one of the highest rates in the world. The home ownership rate in Canada is roughly 69 per cent, compared with 65 per cent in France, 63 per cent in the U.K. and 61 per cent in Japan.

The Trudeau government has said it’s particularly focused on helping first-time homeowners get into the market, but so far most economists think the steps taken — including a 1 per cent tax on non-resident homeowners and funding for affordable housing — are unlikely to make up for the ground lost by prospective homebuyers in the last year.

As a model for alternative policy, the Trudeau government’s critics point to New Zealand, which, faced with a similar housing boom over the past year that was induced by low interest rates, introduced a tax specifically targeting speculation. The government also instructed its central bank to consider housing when setting monetary policy.

Canada’s housing agitators often portray the issue as a conflict between the old and the young, and the propertied and the property-less. But the Bloomberg survey, conducted from April 29 to May 3, suggests that may not be the case. Even though 18 per cent of respondents 18 to 34 said they “support” increasing interest rates to slow the rise of housing prices, compared with 13 per cent of respondents over age 55, the older group was even more likely than the younger group to say they “somewhat support” an increase.

“I think it’s pretty clear to most people that housing in this country is all but out of control,” Benjamin Reitzes, a Canadian rates and macro strategist at BMO Capital Markets, said by email. “While it’s nice to have an appreciating asset, it makes moving to the next home that much more expensive. In addition, for those with kids, it makes you wonder how they’ll be able to afford a home if this continues.”

 


 

On the one hand, you have organized real estate suggesting that it would be unfair to certain segments of the buyer pool, depending on demographics and geography, to further tighten the mortgage stress test.

On the other hand, the general public wants interest rates to increase so that, apparently, they can afford to buy real estate.

Have you ever witnessed such a confusing time?

I don’t even know where to start analyzing how the public thinks that higher interest rates will help their affordability.  Each of those hoops to jump through comes with several steps, each step has a caveat, each caveat has a red flag, and so on.

But one thing is for sure: the conversation is not going to die down.

As it pertains to the discussion here on TRB, I’d love to hear your collective thoughts on whether raising rates or loosening the mortgage stress test are options that should be on the table…

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28 Comments

  1. Verbal Kint

    at 7:20 am

    We know that the word “team” is always spelled “I” here on the blog, but taking credit for another team member’s listing? Come on, David!

  2. Pingback: Best Real Estate Agent In GTA – Mortgage Market: Tighten Or Loosen? – Toronto Realty Blog
  3. David

    at 8:15 am

    With the billions of dollars that the government has thrown into the economy (to say nothing of the trillions added south of the border), I believe it is a questions of when, not if, interest rates will increase.

    The pandemic has made winners and losers out of certain businesses, and the winners are going to be sitting on tons of cash. All of this extra cash is going to generate inflation, which is a really bad situation for Canadians on fixed incomes (seniors – read: voters).

    My read is that interest rates are going to increase, but Trudeau will find some back-door route to make housing easier for marginal buyers to afford (increased HBP, tax supports etc.)

    1. Bob

      at 10:03 am

      If we follow the US and inflation takes off for an extended period then for sure rates will rise and the buyers will scream even more as the rate impact will be immediate while housing prices lag in response.

  4. Pete

    at 10:13 am

    Perhaps I’m being simplistic, but a raise in interest rates that slows housing prices will just mean more money in the hands of the banks, and less money in the portfolio of home owners who will see less appreciation on their largest asset

    1. Al

      at 1:33 pm

      You nailed it. I don’t even know what else to add. Not many desperate or plain jealous people get it, unfortunately.

  5. Motogonif

    at 12:01 pm

    The government-mandated stress test is inherently wrong. It’s systemic housing discrimination.

    If a steakhouse made every customer prove they had $50 cash for a steak in their wallet before being allowed in, only to be charged $35 for that same steak upon entry, there would be a huge hue and cry from all the usual suspects:

    “Steakhouse Blackballs Working Class” – Toronto Star

    “Beefy Bait And Switch: Income Inequality On The Menu” – CBC

    So why is blocking home buyers who could afford a 5.3% mortgage from buying a home if they can’t prove they could afford a 5.4% mortgage, when today’s variable rate can be as low as 1.4%. Elitist and discriminatory.

    If lenders on their own want to mandate stress tests to protect their loans, that’s their call.

    But the government shouldn’t be en masse blocking Canadians from home ownership who can afford it in the name of ‘protecting’ them.

    1. David

      at 12:27 pm

      The problem with your analogy is that you don’t have to make the payments for a steak for 25 years. And 2-5 years down the road, there isn’t someone who says that the cost of paying for your steak has increased by X%.

      1. Motogonif

        at 2:26 pm

        Doesn’t matter. People should run their own numbers and decide if they can afford their payments if rates rise.

        The government forcing this just entrenches richer people in home-ownership and excludes others who could afford if not for some arbitrary nanny state thwarting of their dreams.

        Personal responsibility and free markets need to rule here. Housing has always had people who have to sell if rates go up dramatically. Or lose their job. Or whatever. That’s the market working.

        If that happens, the increased listings will bring the inventory the market needs and prices will moderate allowing all those people the government says they care about to buy. Affordability solved.

        Econ 101.

        1. Clifford

          at 8:29 am

          I agree. The stress test is absolutely stupid in its current form. It does more harm than good. The run up of housing under $1m is all due to the stress test. It created a ceiling but increased the floor on entry level housing.

      2. Bryan

        at 1:08 pm

        There absolutely are people that have to make payments for a steak dinner for 25 years while being susceptible to interest rate hikes. If they pay on a credit card, how is it different, other than being on a smaller scale (and perhaps a little more freedom in terms of when the debt can be cleared without penalty)? Nobody is forced to pay for their steak over 25 years if they can afford otherwise… but neither is anyone forced to pay for a house over 25 years if they can afford otherwise.

    2. cyber

      at 10:31 am

      There is no ‘free market’ in Canada – if there was, there wouldn’t have been a government-protected banking oligopoly among Schedule I lenders (or their backdoor bailout in 2008/2009) and CMHC would not exist at all.

      Almost half of mortgages in Canada are insured, and CMHC insures almost half of those. If marginal borrowers barely qualifying on 25-year liability at current historically low interest rates start defaulting and causing home prices to crash (watch The Big Short, it’s a surprisingly low % of defaults that can topple a system) – it is the government, i.e. the taxpayers, who will be left “holding the bag”. Both directly via portfolio loss on CMHC books, and indirectly via likely need to bail out the Big Six in an even bigger way than last time.

      If there’s anything different crises have taught us, is that people will lie and scheme just to become a homeowner, and that banks will more than happily continue writing mortgages and booking profits as long as the party goes on, while turning a blind eye to potential issues – knowing full well they don’t actually operate in a fully free capitalist market and that their downside is protected as they’re considered “too big to fail”.

  6. Libertarian

    at 12:09 pm

    “We’ll be the generation that can never retire because of housing prices. The barrier to entry has never been higher,”

    It’s sad that people still believe the only way to save enough money to retire is to buy a house.

    Instead of complaining about housing costs and debating interest rates, stress tests, taxes on foreigners, speculation, etc., become financially literate and manage your money.

  7. Don't Trust In The Process

    at 12:24 pm

    Property inspections should be a legislative requirement, and the inspection process itself needs to be tightly regulated. It’s objectively ridiculous that Torontonians can’t properly vet the biggest purchase of their life.

    That’s a lot of work, though, and nobody likes government scrutiny when they’re used to being able to do whatever they want, so it will never happen. The madness continues.

  8. Appraiser

    at 1:05 pm

    The mortgage stress-test is already unrealistic, onerous and unfair. Making it more stringent is senseless. It will result in a further elitist bifurcation of the market by pitting the merely qualified buyers against the “super-qualified” buyers who can handle payments at thrice the going interest rates.

    Inevitably, raising the stress-test will result in even more buyers turning to alternative lenders who are not subject to the federal guidelines, at higher interest rates – for no good reason.

    1. Motogonif

      at 2:31 pm

      1000% agreement. Continued government meddling is not the solution and after it pushes prices even higher, it will be THE reason the whole thing blows up. Read “Hidden In Plain Sight”, a brilliant book about the US 2008 housing meltdown. ALL the fault of moral hazard created by the federal government through a decade plus encouragement of greatly relaxed mortgage underwriting.

    2. Clifford

      at 8:31 am

      100% in agreement. Just follow the money. Who does the stress test benefit? The banks under the guise that homes will be more affordable. Erase 20% of your buying power while homes skyrocket in value. Banks making money hand over fist. But I thought homes were supposed to be more affordable?

      1. Appraiser

        at 9:09 am

        Unfortunately, the cynical quarter of me would say that regulators have concluded that a quick tweaking of their demand-side cudgel a.k.a. the stress-test (a tool that will no doubt erase some portion of the buyer pool, while creating additional negative knock-on effects), is preferable to supply-side solutions, that may require more than one election cycle to resolve.

        Build-Baby-Build !

  9. JL

    at 7:43 pm

    I’m convinced the problem is more “prices are rising out of control” more than “prices are high”, which is driving the FOMO. Lowering interest rates fueled, in large part, much of the recent increase, because it simply gave everyone access to another $100K, $200K? at the same monthly payment. So everyone just bid that much more, and with strong demand it didn’t take long for it to reflect in overall prices. Not sure raising the rate now would reverse the trend overnight, but it would certainly put a bit of a headwind to it. That’s not to say its going to increase affordability; if prices drop but interest rates rise you might still be in the same spot, but at least there’s a chance you can save a bit without the market running away from you.

  10. Keith

    at 12:22 am

    Long before today, the government was complicit in creating huge price increases. Consider a simple model of the real estate market. Every time you add liquidity, prices will increase. Remember, every time the government has intervened in the market to improve “affordability,” prices have risen an equal amount or more in proportion to the added liquidity. So let’s review a few highlights from my lifetime of government and central bank action:

    Down payments gone from 25 percent to zero
    Amortization from 40 years, down to 25 years back to 40 years back to 30?
    RHOSP, then nothing then RRSP withdrawal plan
    Interest rates from 40 years at 4 percent, up to 22 percent down to less than 2

    I’ll propose something that will piss off the real estate industry, the financial industry and crash the real estate market and return affordability to real people. It will also create a secure investment option for working people.

    A regulated mortgage rate of six percent. Tax free bonds will be sold to finance the mortgages, paying four percent. Twenty five percent mandatory down payment, the mortgages insured by the government of Canada.

    There you have it. A down payment requirement and mortgage rate that will cut the price of single family houses down to size. An investment option for your cash that pays an attractive interest rate, providing a good spread for the financial institutions that raise the money and lend it out.

    A market not awash in liquidity, but with safety for purchasers, lenders, investors and taxpayers.

    Here’s the real problems. The track record of government intervention in any market is sketchy at best. Sketchy, with some very spectacular failures. On the flip side, leaving the market to the part of the private sector that self regulates to its own benefit, leads to access to information assymetry that fleeces the consumer, again and again. Crashing the real estate market, while attractive to many will hurt a generation with one asset for their retirement.

    The government stood by as the private sector pension plan went the way of the dodo bird, replaced by a group RRSP that was hugely underfunded and expensive, and not mandatory. They were secure in the knowledge that baby boom homeowners would be ok. They are all in on the real estate market. They cannot correct it with fringe taxation. They can only watch in horror, or get it wrong and impoverish millions. The real estate business is far too large a part of our GDP, and far too large in the net worth of millions. It has become too large, too important and too expensive – and now unfixable.

  11. J G

    at 3:33 pm

    Jack up the rate to 10%, but let me quickly sell all my stocks first 🙂

    Got a small mortgage so don’t care if my monthly go up by a good chunk.

    1. Bal

      at 6:49 am

      i don’t think this will ever end.Market is so crazy i cannot even explain … new home builders are increasing $50,000 prices every other week…and people are paying for it..the way prices are going i think this year average home will hit 2 million

      1. Appraiser

        at 10:58 am

        Do not despair Bal.

        The good news is that the re-sale market appears to have peaked, albeit at a very high level.

        Also, the bad news is that the market has peaked at a very high level.

        Depends on one’s perspective.

        1. Bal

          at 2:47 pm

          Hey Appraiser – I don’t think so as i am looking everyday. New homes builders are still increasing prices …I am trying to get Rosehaven appointment since last week since they opened….but all appointments were booked. starting price was $1,470,000..Finally i got the appointment today and i came to know that the new price is now $1,510,000 …$40,000 increase within one week , and Saleslady told me if you don’t buy today the price is going to increase further….She might be right but my problem is i cannot buy under pressure. …same model was sold last Oct for $1,170,000…it hurts damn it hurts….

        2. J G

          at 8:01 pm

          Can’t think like that Bal.
          Do you HAVE to buy a new home? Are you fixed on a certain area?

          From Apr 2017 to Oct 2018 the price for some GTA properties decreased by a lot. In North York, one house was sold for 3.1M and then 18 month later sold for 2.1M, ouch!!!

          Guess when I bought one of my properties? Sept 2018! Haha. You need to leave the emotion out of it, think logically or all the scum bags in the industry will take advantage of you!

          1. Bal

            at 9:36 pm

            Smart move…..i have no clue what the heck i was smoking in 2018…lol….i look at the house as a living space not as a investment and that is the reason i can not leave emotions out of it….as soon as i see nice modern house..i start to decorate in my mind….lollol…maybe it is woman thing…

  12. Edwin

    at 11:51 am

    Each day that goes by before a rate increase the government is in a tougher spot. The more they let people continue to buy at inflated prices, the more people will be hurt when rates go up. It won’t be a pretty sight. This is why they are doing stuff like the stress test, they are looking for any way possible to curb demand until they can raise rates and not crush the economy.

  13. Go1Mr

    at 9:32 am

    And now Covid has affected the economy even more

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